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Africa: logistical challenges for LNG growth

Please provide an overview of African social/cultural/economic/political and its impact on LNG activities as well as any new developments or trends for 2013 that will impact the African LNG market.

TM: LNG activities in Africa continue to be affected by the traditional challenges of developing major industrial projects in parts of the world without stable political systems or the infrastructure to support those activities.

In much of Africa, development of LNG liquefaction projects requires more than development of the project and the pipelines to move the gas from the field to the project. It also often requires development of the ports, roads, housing and all of the other components necessary to support the project. This is difficult enough where there is a stable government and becomes even more challenging in areas where the government control is weak. These issues will be magnified as companies find resources in areas that were previously off limits due to the lack of an effective government, such as Somalia and Eastern Congo.

One African LNG area that is often overlooked is the possibility of developing small volume regasification capacity to deliver LNG locally in areas that are not adequately served by pipelines or power grids. To keep costs down, these are likely to be floating re-gas terminals, which are sized to a power plant or other end user.

What impact will recent energy M&A activity in Africa have on the region?

TM: For much of the last 20 years, hydrocarbon production in Africa has been dominated by the super majors and large independents that have focused on prolific discoveries in Nigeria, Angola and similar locations. That left wildcat exploration to smaller, less well-capitalized firms that looked in locations that were not of interest to the super majors. Those 20 years of work have opened up real discoveries in areas which were never thought of as particularly prospective, such as Ghana and the West African coast stretching north and south of Ghana, Uganda and Kenya.

M&A activity in Africa for the last few years, and predictably for at least the next five years, will take the form of the smaller entrepreneurial companies that made the discoveries bringing in larger partners or selling out entirely because of the need to finance the tremendous costs of development. It is one thing to raise $500 million for exploration, but it is something entirely different to raise $15 billion for a major deep water development program. The main issue here is the extent to which the country where the discoveries are located will insist on sharing the premiums received by the sellers.

The wild card in all of this is the China, whose appetite for energy assets seems to be unabated by the slowing of the Chinese economy. Chinese acquisitions are helped by the fact that the country is willing to do things that western oil companies cannot, such as couple acquisitions with government-to-government support. Angola is a good example. China has become the largest purchaser of Angolan oil and is supporting railroad and other infrastructure projects around the country.

When and where do you expect regional growth prospects to emerge in Africa?

TM: Africa is poised for unparalleled growth and that growth will be widely spread across the continent. The key is having a period of political and social stability because there cannot be any real economic growth without the growth of a stable political system and the curtailment of lawlessness first. Even Liberia is showing small signs of promise and the eastern Congo could bloom as a result of its large resources if the political situation regularized.

Take Angola, for example. When it emerged from 25 years of U.S. and Soviet-sponsored civil war, its economy was in shambles and the country was one of the most heavily land mined countries in the world. The war dislocated millions of people, many of whom moved to Luanda, the capital. Since the end of the civil war, development in Angola has been uneven, but at least it has occurred at a steadily increasing level, largely fueled by increased oil and other natural resources levels.

What do you think the LNG industry will look like 10 years from now?

TM: The major variable that makes predictions difficult is whether the U.S. will become a major LNG exporter. But ignoring the impact that U.S. exports will have on the market, I predict that the development of smaller receiving terminals to serve lower volume demands will have a significant impact of the structure of the market, which to date continues to be dominated by long-term contracts between a liquefaction source and a large volume receiving terminal. The development of multiple lower volume receiving terminals may finally allow for the development of a spot LNG market, or, at least, a market that allows the development of supply that sells to multiple customers on a variety of bases.